Preparing for the new tax year basis — Income Tax Self Assessment
HMRC have provided the following notes regarding the change to the tax year basis:
The rules HMRC uses to work out sole traders’ and partners’ profits for Income Tax in a Self Assessment return are changing for many businesses for 2023 to 2024 onwards. This may affect the return that they must submit by 31 January 2025. It will also affect subsequent returns.
Only taxpayers with an accounting date other than 31 March or 5 April are affected by this reform.
Under the new rules, from April 2024, businesses will be taxed on profits for the tax year and not, as now, the profits for the accounting year ending in a tax year.
For 2024 to 2025 and future years where accounting years are different from the tax year end, the taxable profits will be worked out by apportioning the profits for the 2 accounting periods that straddle the tax year.
The year 2023 to 2024 is a ‘transition year’ in which self-employed businesses will move to the new way of calculating taxable profits for the tax year.
Businesses will need to declare the total profits from the end of the last accounting date in 2022 to 2023 up to 5 April 2024. This means that profits generated over a longer period will be taxable in the transition year.
In 2023 to 2024, businesses can use any overlap relief resulting from overlap profit when the business first started. By default, any remaining additional profit can be spread over 5 years.
As an example, if a business’s accounting date is 31 December, they must declare profits from 1 January 2023 to 5 April 2024 (15 months rather than 12) in their tax return for the tax year 2023 to 2024, which is due by 31 January 2025.
The transition year 2023 to 2024 will present an opportunity for all businesses currently trading, regardless of accounting date, to use any overlap relief due.
From 2023 to 2024 onwards, some businesses might have to use provisional figures on their returns. More information about this will be available in due course.
Where a business’s accounting date is changed in 2022 to 2023, the current change of accounting date rules will apply. Where a business decides to change its accounting date from 2023 to 2024 onwards, these rules will not apply, and a change can be made regardless of past changes.
